What is a Roth Conversion, and Why Would I Do That?

Paying taxes on purpose sounds backwards...until you understand why Roth conversions are one of the most talked-about retirement planning strategies for people nearing retirement.

In this episode of The Perfect Retirement Plan?, Phillip Smith explains what a Roth conversion actually is, why some retirees use them to reduce future taxes, and when they make sense (and when they don’t). This is a no-hype, plain-English walkthrough designed for people getting close to retirement (and those recently retired) who want clarity, not pressure.

We cover how Roth conversions work, how they show up on your tax return, the five-year rules that confuse almost everyone, and how conversions fit into a broader retirement income, Medicare, and legacy planning strategy. This episode is especially relevant if you’re retiring in Oregon (or another state with income tax) and are thinking about RMDs, Social Security timing, or tax diversification.

If you’ve searched “what is a Roth conversion,” “should I do a Roth conversion,” “Roth conversion explained,” or “how to reduce taxes in retirement,” this episode is for you.

Episode Chapters

00:00 – Why paying taxes on purpose feels wrong
 01:48 – What a Roth conversion is and is not
 02:44 – How Roth conversions actually work
 03:24 – Paying taxes now vs later
 04:51 – The five-year rules explained clearly
 06:12 – Why retirees use Roth conversions
 07:35 – RMDs, Medicare, and tax control
 09:16 – When Roth conversions may not make sense
 10:13 – The best timing windows for conversions
 11:04 – Transfers vs rollovers vs conversions
 13:17 – How to execute a Roth conversion correctly
 14:19 – A real-world tax example
 16:32 – Common Roth conversion mistakes
 18:14 – How to think about conversions long-term
 18:43 – Action steps and next moves

More resources at TidepoolWealth.com and on YouTube @TidepoolWealth.

#RothConversion #RetirementPlanning #TaxPlanning #RetirementTaxes #howtoretire #OregonRetirement #RothIRA #RMDPlanning #MedicarePlanning #TidepoolWealth

Thanks for tuning in to this episode of The Perfect Retirement Plan, and remember: it's not about having the smartest financial advisor, the most money saved, or the highest probability of retirement success. The perfect retirement plan, for you – is the one you act on.

Phillip Smith, CRPC AIF |  Financial Planner
Tidepool Wealth Strategies
450 Country Club Road, Suite 350 | Eugene, OR | 97401

____________________________________________________________________________________________
Additional Disclosures: 
The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. 

Transcript

Episode: "What is a Roth Conversion, and Why Would I Do That?”

Outline

• Intro
• What a Roth Conversion Actually Is
• Why People Do Roth Conversions
• The “You Don’t Need a Roth Conversion” Argument
• When Roth Conversions Make Real Sense
• Why Timing Matters
• Roth Conversion vs Transfer vs Rollover
• How a Roth Conversion Actually Works (Traditional IRA Example)
• The Tax Forms You Should Know About
• Common Misunderstandings
• Action Steps
• Closing

[Cold Open]

“Eating a bigger tax bill on purpose sounds backwards…until you understand why some retirees do it.”

[CANNED INTRO – pre recorded]

Hi, I’m Phillip Smith, financial planner with Tidepool Wealth Strategies, helping you figure out how to retire with confidence when you’re nearing retirement, and helping you build a plan that adapts as life changes when you’re already retired. Welcome to The Perfect Retirement Plan?

[Intro]

Roth conversions are one of those topics that, once people start hearing about them, they start assuming they should understand, but don’t feel comfortable admitting that they don’t.

And, the conversion topic weaves into a discussion about taxes, which already makes most people want to tune out. So instead of digging in, people can tend to mentally file the whole thing under, “I’ll…deal with that later.”

And eventually, for some, a nagging question emerges: is this something I’m supposed to be doing? Or does it not really apply to me?

You know how your phone asks you to update the software, and you keep clicking “remind me later” because you’re not sure how long the update will take, whether it will drain the battery completely, or what’s going to change? Mentally, that place of uncertainty is where Roth conversions can tend to end up living.

And, honestly, this is one of my favorite conversations to have with people. Not because Roth conversions are exciting, but because once this clicks, I have seen stress level drop. I see client confidence rises. Helping people get clarity around this stuff is a big part of what I do – and I love it.

So today, we’re slowing this down – a little. No hype. No pressure. Just a clear explanation of what a Roth conversion actually is, why someone might consider doing one – or series of them, and when it truly makes sense for someone — and when it doesn’t.

[Roadmap]

Here’s where we’re headed.

We’ll start with a plain-English explanation of what a Roth conversion is, and just as important, what it is not.

Then we’ll talk about why people do Roth conversions in the first place, and why some people strongly argue they’re unnecessary.

After that, we’ll walk through when Roth conversions make real sense, why timing matters, and how they often fit into a broader retirement income plan.

We’ll also cover how a Roth conversion actually works, using a Traditional IRA as the starting point for our example. We should also touch on why it’s considered a distribution and not a transfer, and cover what tax forms show up afterward.

By the end, you should understand this well enough to decide whether it’s worth exploring further.

This is such a tax-heavy topic that it’s important to say this now, not in the closing disclosure – I’m not a tax pro. I have a tax planning designation, but planning is not the same as interpreting tax law. Always consult with your tax professional when it comes to things like Roth conversions.

[What a Roth Conversion Actually Is]

At its core, a Roth conversion is simply moving money from a pre-tax retirement account into a Roth account.

Most commonly, that means taking money from a Traditional IRA and converting it into a Roth IRA.

The key thing to understand is this: money in a Traditional IRA is tax-deferred, meaning if you’re doing it right, you have not yet paid taxes on the money inside this account. The IRS hasn’t received their cut yet. 

A Roth conversion is the moment you choose to pay those taxes.

You’re voluntarily recognizing income now, paying ordinary income tax on the amount converted, and in exchange that money can grow and, if you’ve met a couple of requirements, it’ll eventually be accessible as qualified distributions, which simply means you can take the money out tax-free in the future.

This is not a contribution. Income limits that apply to Roth IRA contributions do not apply to Roth conversions.

Think of it like this: you’re choosing to settle the tax bill today so future-you doesn’t have to deal with it later.

And before we continue – those two requirements. In order for the money you distribute from a Roth IRA to be 100% tax free, you have to be 59 ½ or older and the Roth IRA must have been open for 5 tax years. 

I don’t want to confuse anyone, but it needs to be said clearly: for conversion amounts, there is a separate 5-tax-year clock on each conversion. Which means that even if you’re, say 65 and just did a conversion, the converted amount can be withdrawn whenever with no tax consequence, but the growth needs to sit in the Roth IRA across 5 tax years before it is tax-free.

I emphasize tax years because we’re not talking about 60 months. We’re talking about any time within a year you file taxes for is considered the ‘tax year.’ December of Year 1 counts for the whole tax year. January of Year 5 counts for the whole tax year. So if you do a conversion in December of 2026, all other requirements being met, you can take a distribution in January of 2030 and it will be 100% tax free. That’s technically only 3 years and 2 months.

Sorry, that was a bit of a tangent. But hopefully it helps someone.

[Why People Do Roth Conversions]

Now, people don’t do Roth conversions because they enjoy paying taxes. They do them because of what it can solve long-term.

One big reason is tax control.

Maybe you know exactly what tax rate you’re paying today. Which is great, because many people aren’t paying attention. Future tax rates are unknown. But - a Roth conversion locks in a known rate.

We’re what, $37 trillion deep in Federal debt? They have two levers to close the gap: reduce spending, raise tax revenue. A betting man would say that taxes are likely to go up at some point in the future.

Another reason people do Roth conversion is to reduce their future Required Minimum Distributions, or RMDs. See, Traditional IRAs eventually force withdrawals whether you need the income or not. Roth IRAs do not.

That means Roth money gives you more flexibility later. You can choose when to use it, how much to use, or whether to leave it untouched.

Roth conversions can also help manage Medicare premiums, reduce tax-bracket spikes later in retirement, and create tax-free income that pairs well with Social Security.

And on top of all that, it’s a fantastic legacy planning tool. Pay taxes today, leave beneficiaries a tax-free pot of money.

This isn’t about beating the IRS. It’s about being aware of the rules and using them to your advantage.

[The “You Don’t Need a Roth Conversion” Argument]

You’ll often hear people say Roth conversions are unnecessary.

They’ll say things like, “You’ll be in a lower tax bracket later,” or “Why would you pay taxes on purpose?” Or, I even hear, “Well, all things being equal, you’ll be in the same tax bracket in the future – there’s no actual savings.”

Sometimes, they’re right.

If someone truly expects much lower income later, has small pre-tax balances, plans to live very simply, or knows that their intent is to leave their IRA money to charity, a Roth conversion may not add much value.

The problem is when that advice gets applied broadly.

Roth conversions are situational. They are not automatically good or bad. They either fit your situation or they don’t. And sometimes the situation changes.

And this is where planning really matters. Because the right answer isn’t “yes” or “no.” It’s “it depends.” 

Quite frankly, that’s why some people hire our office. They don’t want blanket statements. They want judgment, context, and someone to help them think it through. Not once, but ongoing. Our value proposition is relational as much as anything else.

[When Roth Conversions Make Real Sense]

Roth conversions tend to make the most sense during certain windows.

Early retirement years are a big one. Income is often lower before Social Security and pensions begin.

Those lower-income years can create a planning window where converting at relatively modest tax rates is possible. They can also make sense for people with large pre-tax balances who want to reduce future RMD pressure.

And, another common reason is tax diversification. Having money in different tax buckets can give you more flexibility later.

[Why Timing Matters]

Roth conversions are rarely a one-time event.

They’re often done gradually over several years, intentionally filling up certain tax brackets without spilling into higher ones.

Timing matters because converting too much at once can create unnecessary tax pain.

This is about control, not speed.

This is also where having an accountability partner matters. Roth conversions don’t fail because people don’t understand them. They fail because life gets busy and nobody helps you stay intentional year after year. That’s a big part of how we serve our clients.

[Roth Conversion vs Transfer vs Rollover]

So, conversion, distribution, transfer, rollover. If you don’t know these terms, it’s industry jargon. This is a spot where a lot of confusion sneaks in, so let me slow this down.

People may use words transfer, rollover, and conversion as if they all mean the same thing. They don’t.

When I’m talking with a client, I’ll might phrase it this way: not all money moves are treated equally by the IRS. And each term means something different.

A transfer is the simplest. That’s just moving money from one account to another account of the same type. Traditional IRA to Traditional IRA. Roth IRA to Roth IRA. Same tax treatment. No income. No tax bill.

A rollover is usually what happens when money comes out of a workplace retirement plan, like a 401(k), and moves into an IRA. If it’s done correctly, it should also have no tax consequence. The IRS has very specific rules around rollovers, but the goal is still to avoid triggering taxes and keep the money in qualified retirement account.

A Roth conversion is different.

When you do a Roth conversion, you are intentionally taking money out of a pre-tax account. The IRS treats that as a distribution, which means it shows up as income.

You’re choosing to redirect that distribution into a Roth IRA instead of spending it, but from a tax perspective, it’s still income.

That’s why you may hear me emphasize this so much: a Roth conversion is not a transfer. It’s a taxable distribution that you’re intentionally using for long-term planning.

[How a Roth Conversion Actually Works (Traditional IRA Example)]

Here’s what this looks like in practice:

·       You decide how much of your Traditional IRA you want to convert.

·       Your custodian processes that amount as a taxable distribution.

·       The money moves into your Roth IRA.

·       You owe income tax on the converted amount for that year.

·       Ideally, the tax is paid from money outside the IRA. And, sidenote, this is more of strategic thing. Happy to chat about it.

There is no early withdrawal penalty when this is done correctly. “Correctly” means if you’re under 59 1/2, DO NOT pay the taxes from the Traditional IRA. Any amount distributed that is not converted to the Roth IRA counts as an actual nonqualified distribution, and since you’re under 59 ½, you’ll be required to pay the early withdrawal penalty on that portion. This gets overlooked. Here’s a quick numbers example:

You’re 58, and you convert $100,000 from Traditional IRA to Roth IRA. Let’s ay you live in Oregon. Your Fed tax rate is 22% and you withhold 8% for state. That’s a 30% total tax withholding. Okay, that in mind, you decide to pay the taxes from the Traditional IRA. So, you convert $100,000, but you pay $30,000 in taxes, so only $70,000 arrives in the Roth IRA. The part that didn’t show up in the Roth counts as a nonqualified distribution. So now you have an additional $3,000 you owe as a result of the 10% early withdrawal penalty on the $30,000 “distribution.” Yuck.

If you can afford it, pay the taxes from somewhere else, and allow the foll $100,000 to arrive in the Roth IRA. It saves you $3,000 in penalties, and you have more money able to grow in that eventually-100%-tax-free account.

[The Tax Forms That Show Up]

Okay, so let’s say you did the conversion. Now you have two tax forms to deal with.

• A 1099-R shows the distribution from the Traditional IRA
• Form 8606 tracks the Roth conversion for the IRS

The 8606 can look intimidating, but it’s simply documenting what already happened. Tax software can do this for you. A CPA doesn’t even blink at the thought of this form.

And just to say it out loud, this is the point where a lot of people decide they don’t want to do this alone. Not because it’s impossible, but because it’s easier when someone’s helping you connect the dots between the planning, the taxes, and the long-term picture.

[Common Misunderstandings]

There are some common misunderstandings and blind spots that can occur. Misunderstandings are where I see people get tripped up the most.

One common misunderstanding is converting too much at once. “Oh, I’ll just do the whole thing and be done with it.” Just because you can convert a large amount doesn’t mean you should. Large conversions can push you into higher tax brackets, create surprise tax bills, and ripple into things like Medicare premiums.

Another big one is forgetting about state taxes. Federal taxes get most of the attention, but if your state has an income tax, then state taxes may still matter. A conversion can look reasonable on paper until you factor in the full tax picture.

I also see people pay the conversion taxes from the IRA itself. That usually undermines the whole point. Pulling money out to pay the tax reduces how much actually makes it into the Roth, and in some cases – as I previously mentioned – can trigger penalties.

Medicare is another blind spot. Higher income from conversions can increase Medicare premiums later. That doesn’t mean conversions are bad, but it does mean they should be thoughtfully coordinated.

And finally, probably the biggest mistake I’ve seen is doing Roth conversions without a long-term plan. Conversions work best when they’re part of a multi-year strategy, not a one-off decision made in isolation.

Coordination matters. Taxes, income planning, Medicare, future required minimum withdrawals – they all connect, whether we like it or not.

[Action Steps]

New episode length record. Probably time to hit those action items.

• First, understand how much of your retirement savings is pre-tax
• Second, try to identify those future years where income might be lower
• Third, talk with a professional – a financial advisor, tax professional – or both! –  about whether Roth conversions fit your situation

[Closing]

If this episode was helpful, subscribe and share it with someone you’ve heard asking questions about Roth.

Remember, the perfect retirement plan isn’t about having the smartest financial advisor, the most money saved, or the highest probability of retirement success. 

The perfect retirement plan for you is the one you act on.

And now, some lengthy episode-specific disclosures to get you warmed up for the regular closing disclosures:

Some IRA's have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Retirement Plans: Distributions from traditional IRA's and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. Roth IRA: Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

[Disclosure clip]

It’s disclosure time! This podcast is intended for educational purposes only and should not be used for any other purpose. The views depicted in this material should not be considered specific advice or recommendations for any individual, are not intended to be financial, tax, or legal advice and are not representative of Tidepool Wealth Strategies or Cetera Wealth Services LLC. The opinions contained in this material are those of Phillip Smith, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete.  For a comprehensive review of your personal situation, always consult with a financial, tax or legal advisor. Neither Cetera nor any of its representatives may give legal or tax advice. 

Our office address is 450 Country Club Road Suite 350 Eugene Oregon 97401. Securities offered through Cetera Wealth Services, LLC, member FINRA/S I P C. Advisory Services offered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity.